Amathus Drinks PLC v EAGK LLP & Anor

The court considered applications by the defendants for strike out or summary judgment in a professional negligence claim by purchasers and members of a company against the company's auditors. Applying the summary judgment test in Easyair and the law on negligent misstatement and assumption of responsibility (Hedley Byrne and subsequent authorities), the Master concluded that there was no realistic prospect that the purchasers were parties to the engagement letter dated about 7 September 2015 and therefore granted summary judgment for the defendants on the contractual claim.

As to the tort claim, the court held that, despite a Bannerman-style disclaimer in the engagement materials and statutory audit reports, there was a realistic prospect that the auditors had assumed responsibility to the buyers because of the continuing and direct communications between the auditor and the buyers, the particular form and use of the Completion Certificate and related post-engagement conduct. Accordingly the application was dismissed so far as the negligence claim was concerned, with an order for specific disclosure under Practice Direction 57AD so that the claimants can particularise alleged breaches of duty.

This case concerned alleged negligent preparation of statutory accounts and a Completion Certificate by an accounting firm (EAGK) which were used to determine the purchase price in a share purchase agreement. The claimants (the purchasers and two related parties) alleged that the auditors had both a contractual duty (by reason of an engagement letter) and a common law duty (by reason of assumed responsibility) to exercise reasonable care and skill and that failures in the audit allowed a fraud to inflate the target company's net assets, causing loss.

• Nature of the application: the defendants applied to strike out the claims or for summary judgment.
• Issues framed: (i) whether the buyers were parties to the engagement contract with the auditors; (ii) whether the auditors owed a tortious duty of care to the buyers by reason of an assumption of responsibility despite a disclaimer (Bannerman clause); (iii) whether the particulars of breach were sufficiently pleaded without expert material and whether disclosure should be ordered; and (iv) issues of causation and competing counterfactuals.

Court's reasoning:

• On the contractual claim the court held there was no realistic prospect the engagement was made with the buyers. Key factors were the contents of the schedule of engagement addressed to the company and referring to the Companies Act 2006 audit duties, disclaimers directed to the company and its members as a body, the absence of witness evidence explaining why the buyers were party to the retainer and the unlikelihood that any missing engagement letter would alter the clear documentary matrix. Summary judgment was therefore granted on the contract claim.
• On the tort claim, the court applied authorities on negligent misstatement and assumption of responsibility (including NRAM v Steel and the analytical approach in Hedley Byrne). Although the disclaimer could be a strong factor negating an assumption of responsibility (as in Barclays v Grant Thornton), the judge found distinguishing features: continuing direct communications between the auditor and the buyers, the Completion Certificate being addressed to the buyers and sellers (and not only to the company), and factual matters that require oral evidence and disclosure. Those factors rendered a finding of assumed responsibility reasonably arguable and the court refused summary judgment on the tort claim.
• Because particulars of alleged breaches were incompletely pleaded and relevant documents were held by the defendants, the court ordered specific disclosure under Practice Direction 57AD para 5.11 and directed consequential case management steps. The court also permitted the claimants to plead alternative counterfactuals at this stage, subject to evidential support later.

The court therefore entered summary judgment for the defendants on the contract claim but allowed the negligence claim to proceed, with directions for disclosure and further case management.

First instance decision: summary judgment granted to the defendants on the contractual claim because there was no realistic prospect that the buyers were parties to the engagement retainer (the written engagement and contemporaneous documents showed the engagement was to the company and to members as a body, no witness evidence supported the contrary and it was fanciful that any missing engagement letter would change that conclusion). The application was otherwise dismissed: the negligence claim was allowed to proceed because there was a realistic prospect that the auditors had assumed responsibility to the buyers, and disclosure was ordered under Practice Direction 57AD so the claimants can particularise alleged breaches of duty.